This week on The Vault, we heard from someone who’s ready to make the leap into self-employment but terrified of getting the money side wrong. The work part feels exciting. The tax, the irregular income, the not knowing if you’re doing it right, that’s the bit that scares people.
So if you’re in that position, or you’re already self-employed and still winging it a bit, this is for you.
When your income changes every month, standard budgeting advice just doesn’t land. You can’t plan around a number that doesn’t exist yet. The good news is that you don’t need a fixed paycheque to have a solid budget, you just need a different system.
Here are the two methods we swear by.
Method one: work a month behind
Instead of trying to predict what you’ll earn this month, you base your budget on what you earned two months ago.
March’s budget is based on January’s income. April’s budget is based on February’s. You already know the number before the month starts, which means no guessing, no hoping, no crossing your fingers that the invoices come in on time.
To get started, you need one month’s expenses saved up as a buffer. After that, you’re always spending money you already have, not money you’re waiting on. Slow months stop feeling catastrophic because you’re not living on income that hasn’t landed yet.
Method two: the waterfall budget
This one works by deciding in advance what happens to your money when it lands, in priority order.
Start by figuring out your bare minimum, the absolute essentials you need covered every month no matter what. Build your budget around that number.
Then, when money comes in, it flows down in this order:
- Needs first – rent, bills, food, anything non-negotiable
- Sinking funds – tax pot, business expenses, emergency fund
- Business costs – software, subscriptions, anything you need to keep working
- Flexible spending – the rest of your life
The key is having the plan ready before the money arrives. When a good month hits, you’re not making decisions at the moment, you already know exactly where it goes.
The one thing both methods have in common
Neither of them work without a tax pot.
When you’re employed, tax disappears before you ever see it. When you’re self-employed, it’s sitting in your account looking like spending money. It isn’t. Set aside 25-30% of everything you earn into a separate pot and don’t touch it. Treat it like it’s already gone.
The same goes for your emergency fund. There’s no sick pay, no redundancy, no guarantee of next month’s income. Your emergency fund is what keeps a slow month from becoming a crisis. Aim for three to six months of living expenses.
You don’t need a fixed income to know your numbers
Pick a method, set up your pots, and the unpredictability becomes a lot easier to live with.
This content is for general information only and does not constitute financial advice. If you need advice tailored to your personal circumstances, please speak to an authorised financial adviser.